Negative Externality: Meat industry blamed for largest-ever 'dead zone' in Gulf of Mexico

This article, Meat industry blamed for largest-ever 'dead zone' in Gulf of Mexico,

suggests that the market quantity for meat products is greater than it should be.  The chemical run-off of fertilizers and other agricultural inputs that go into the production of meat products flow into waterways.  Its negative affects go much further than the borders of the farms and ranches. Some excerpts:

"Toxins from manure and fertiliser pouring into waterways are exacerbating huge, harmful algal blooms that create oxygen-deprived stretches of the gulf, the Great Lakes and Chesapeake Bay, according to a new report by Mighty, an environmental group chaired by former congressman Henry Waxman... 

...Nutrients flowing into streams, rivers and the ocean from agriculture and wastewater stimulate an overgrowth of algae, which then decomposes. This results in hypoxia, or lack of oxygen, in the water, causing marine life either to flee or to die... 

...America’s vast appetite for meat is driving much of this harmful pollution, according to Mighty, which blamed a small number of businesses for practices that are “contaminating our water and destroying our landscape” in the heart of the country..."

If the problem IS production over a more "socially optimal" level of production, how do we attain that optimal level?

The essential problem is that the cost of the externality is not being borne by the consumer or producer of the product.  Consumers are paying and producers are receiving only the money cost to make the product available. They are not paying for the residual costs of environmental degradation that affect others near and far (out into the Gulf of Mexico!).

Our task here is to use the basics of Supply and Demand to illustrate how markets respond to government intervention in order to require Producers and/or Consumers to "internalize" that "external" cost that has been imposed on the rest of society.

Internalizing that cost can take the form of an explicit tax on the good or some other "non-monetary" rule or regulation that de facto internalizes the cost of producing the good.

I put together a short-ish presentation to show you how this is modeled for AP Microeconomics. The key here is to correctly identify the "area of Dead Weight Loss" in the presence of a Negative Externality.

Meat product social cost** from Gene Hayward

AP Microeconomics lesson on Negative Externalities. Nice real life example!

A report by the US Dept of Agriculture suggests LOTS of food in the US goes to waste. They estimate that 31% of food produced and sold to consumers in 2010 was not consumed and disposed of in a variety of ways.  The report is interesting and has some nice pie chart graphics that are suitable for showing in class for  a variety of academic disciplines. The food chain affects many segments of the society. The link is HERE

What caught my eye in the report was the passage below.  It speaks directly to an important concept in AP Microeconomics that we study in the unit on Social Cost and Social Benefits of production and consumption.

It gives an EXCELLENT definition of Negative Externalities and some appropriate examples:

Perfect opportunity to show with Supply and Demand graphs how this plays out in terms of Price and Market Quantity as we search for the "Socially Optimal level of production" at a "Socially Optimal Price".

The point of this analysis is to illustrate the Dead Weight Loss that occurs to society from the uncompensated costs/damage that is done to parties OTHER than the ones directly involved in the production or consumption of a good. It in some measure represents the explicit Opportunity Costs of the good in question.

The good I am going to use in the slides below is "Hamburger Meat".  Beef production is pointed out in the Dept of Labor report as a pretty large offender in creating Negative Externalities.

Slides have the relevant explanation on them.  Hope this helps you understand this concept better.

Look at this last slide. Place your cursor at any point between "Q1S.O. and Qe".  Move up thought the blue Dead Weight Loss triangle until you get to the "S1=MSC" curve.  At that point the Marginal SOCIAL Cost of producing that Quantity is GREATER than (now go DOWN to the "D=MPB" curve) Marginal PRIVATE Benefit of producing that Quantity.

We will want to move DOWN and to the LEFT on the MSC curve and UP and to the RIGHT on the MPB curve until we reach Point "C" where Marginal Social Cost = Marginal Private Benefit.

Anywhere in the BLUE triangle represents production costs that are not being covered by the paying consumer.